Pro
Content
Protectionism
From Wikipedia, the free encyclopedia
Jump to: navigation, search "Protectionist" redirects here. For other uses, see Protectionist (disambiguation).
Part of a series on
Economic systems
Ideological systems
Anarchist · Capitalist Communist · Corporatist Fascist · Georgist Islamic · Laissez-faire Market socialist · (Neo-) Mercantilist Participatory Protectionist · Socialist Syndicalist
Systems
Closed (Autarky) · Digital Dual · Gift · Informal Market · Mixed · Natural Open · Planned · Subsistence Underground · Virtual
Sectors
State Sector · Private sector Voluntary sector · Nationalization Privatization · Municipalization Liberalization · Corporatization Deregulation · Socialization Collectivization · Common ownership
Marketization · Expropriation Financialization Other types of economies Anglo-Saxon · Feudal Global · Hunter-gatherer Information Newly industrialized country Palace · Plantation Post-capitalist · Post-industrial Social market · Socialist market Token · Traditional Transition · Barter State capitalist · State-directed Business and economics portal v·d·e
Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to discourage imports and prevent foreign take-over of domestic markets and companies. This policy contrasts with free trade, where government barriers to trade and movement of capital are kept to a minimum. In recent years, it has become closely aligned with antiglobalization. The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which protect businesses and workers within a country by restricting or regulating trade with foreign nations.
Contents
[hide]
1 History o 1.1 Protectionism in the United States 2 Protectionist policies o 2.1 De facto protectionism 3 Arguments for protectionism o 3.1 The "Comparative Advantage" argument has lost its legitimacy o 3.2 Domestic tax policies can favor foreign goods o 3.3 Infant industry argument o 3.4 Unrestricted trade undercuts domestic policies for social good 4 Arguments against protectionism
5 Current world trends o 5.1 Protectionism after the 2008 financial crisis o 5.2 New US incoming airmail compliance 6 See also 7 References 8 External links
[edit] History
Punch cartoon, 1930: The character on the right represents a skeptical Britain becoming increasingly protectionist and dissatisfied with its Free Trade policies, as represented by the Micawber character to the left, during the Great Depression. Historically, protectionism was associated with economic theories such as mercantilism (that believed that it is beneficial to maintain a positive trade balance), and import substitution. During that time, Adam Smith famously warned against the 'interested sophistry' of industry, seeking to gain advantage at the cost of the consumers.[1] Most modern economists agree that protectionism is harmful in that its costs outweigh the benefits, and that it impedes economic growth.[2][3] Economics Nobel prize winner and trade theorist Paul Krugman once famously stated that, "If there were an Economist‘s Creed, it would surely contain the affirmations 'I understand the Principle of Comparative Advantage' and 'I advocate Free Trade'."[4] Recent examples of protectionism in developed countries are typically motivated by the desire to protect the livelihoods of individuals in politically important domestic industries.[citation needed] Whereas formerly mostly blue-collar jobs were being lost from developed countries to foreign competition[citation needed], in recent years there has been a renewed discussion[by whom?] of protectionism due to offshore outsourcing and the loss of white-collar jobs.
[edit] Protectionism in the United States
Free trade and protectionism are regional issues. Free trade in America is the policy of economics developed by American slave holding states and protectionism is a northern, manufacturing issue.[citation needed] Although not as animating an issue as slavery, differences in trade between the two regions contributed to the Civil War and remain a point of national difference even today.[citation needed] Historically, southern slave holding states, because of their low cost manual labor, had little perceived need for mechanization, and supported having the right to purchase manufactured goods from any nation. Thus they called themselves free traders. Northern states, on the other hand, sought to develop a manufacturing capacity, and successfully raised tariffs to allow nascent Northern manufacturers to compete with British competitors. Beginning with 1st U.S. Secretary of the Treasury Alexander Hamilton's "Report on Manufactures", in which he advocated tariffs to help protect infant industries, including bounties (subsidies) derived in part from those tariffs, the United States was the leading nation opposed to "free trade" theory. Throughout the 19th century, leading U.S. statesmen, including Senator Henry Clay, continued Hamilton's themes within the Whig Party under the name "American System." The opposed Southern Democratic Party contested several elections throughout the 1830s, 1840s, and 1850s in part over the issue of the tariff and protection of industry. However, Southern Democrats were never as strong in the US House as the more populated North. The Northern Whigs sought and got higher protective tariffs, over the bitter resistance of the South. One Southern state precipitated what was called the nullification crisis over the issue of tariffs, arguing that states had the right to ignore federal laws. Mostly over the issue of abolition and other scandals, the Whigs would ultimately collapse, leaving a void which the fledgling Republican Party, led by Abraham Lincoln, would fill. Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade. He implemented a 44 percent tariff during the Civil War in part to pay for the building of the Union-Pacific Railroad, the war effort, and to protect American industry.[5] This support for Northern industry was ultimately successful. By President Lincoln's term, the northern manufacturing states had ten times the GDP of the South. Armed with this economic advantage, the North was easily able to defeat the South by starving the South of weapons through a near total blockade, while at the same time was able to supply its own army with everything from heavy artillery to repeating Henry rifles. With the North winning the Civil War, Republican dominance was assured over the Democrats. Republicans continued to dominate American politics until around the early 20th century. President William McKinley stated the United States' stance under the Republican Party as thus: "Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man. [It is said] that protection is immoral…. Why, if protection builds up and elevates 63,000,000 [the U.S. population] of people, the influence of those 63,000,000 of people elevates the rest of the world. We cannot take a step in the pathway of progress without benefiting mankind everywhere. Well,
they say, ‗Buy where you can buy the cheapest'…. Of course, that applies to labor as to everything else. Let me give you a maxim that is a thousand times better than that, and it is the protection maxim: ‗Buy where you can pay the easiest.' And that spot of earth is where labor wins its highest rewards."[6] Southern Democrats gradually rebuilt their party, and allied themselves with Northern Progressives. They had many differences but both were staunchly opposed to the great corporate trusts that had built up, and Republican corruption was endemic.[citation needed] This marriage of convenience to face a common enemy reinvigorated the Democratic Party, which catapulted back into power. Northern Progressives sought free trade to undermine the power base of Republicans – Woodrow Wilson would admit as much in a speech to Congress. A brief resurgence by Republicans in the 1920s was disastrous for them. Woodrow Wilson's ideological understudy[citation needed], Franklin Roosevelt, would essentially blame the Great Depression upon the protectionist policies exemplified by the previous Republican President, Herbert Hoover.[citation needed]
[edit] Protectionist policies
A variety of policies have been claimed to achieve protectionist goals. These include: 1. Tariffs: Typically, tariffs (or taxes) are imposed on imported goods. Tariff rates usually vary according to the type of goods imported. Import tariffs will increase the cost to importers, and increase the price of imported goods in the local markets, thus lowering the quantity of goods imported. Tariffs may also be imposed on exports, and in an economy with floating exchange rates, export tariffs have similar effects as import tariffs. However, since export tariffs are often perceived as 'hurting' local industries, while import tariffs are perceived as 'helping' local industries, export tariffs are seldom implemented. 2. Import quotas: To reduce the quantity and therefore increase the market price of imported goods. The economic effects of an import quota is similar to that of a tariff, except that the tax revenue gain from a tariff will instead be distributed to those who receive import licenses. Economists often suggest that import licenses be auctioned to the highest bidder, or that import quotas be replaced by an equivalent tariff. 3. Administrative barriers: Countries are sometimes accused of using their various administrative rules (e.g. regarding food safety, environmental standards, electrical safety, etc.) as a way to introduce barriers to imports. 4. Anti-dumping legislation Supporters of anti-dumping laws argue that they prevent "dumping" of cheaper foreign goods that would cause local firms to close down. However, in practice, anti-dumping laws are usually used to impose trade tariffs on foreign exporters. 5. Direct subsidies: Government subsidies (in the form of lump-sum payments or cheap loans) are sometimes given to local firms that cannot compete well against foreign imports. These subsidies are purported to "protect" local jobs, and to help local firms adjust to the world markets. 6. Export subsidies: Export subsidies are often used by governments to increase exports. Export subsidies are the opposite of export tariffs, exporters are paid a percentage of the value of their exports. Export subsidies increase the amount of trade, and in a country with floating exchange rates, have effects similar to import subsidies. 7. Exchange rate manipulation: A government may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign
exchange market. Doing so will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade balance. However, such a policy is only effective in the short run, as it will most likely lead to inflation in the country, which will in turn raise the cost of exports, and reduce the relative price of imports. 8. International patent systems: There is an argument for viewing national patent systems as a cloak for protectionist trade policies at a national level. Two strands of this argument exist: one when patents held by one country form part of a system of exploitable relative advantage in trade negotiations against another, and a second where adhering to a worldwide system of patents confers "good citizenship" status despite 'de facto protectionism'. Peter Drahos explains that "States realized that patent systems could be used to cloak protectionist strategies. There were also reputational advantages for states to be seen to be sticking to intellectual property systems. One could attend the various revisions of the Paris and Berne conventions, participate in the cosmopolitan moral dialogue about the need to protect the fruits of authorial labor and inventive genius...knowing all the while that one's domestic intellectual property system was a handy protectionist weapon." [7]
[edit] De facto protectionism
In the modern trade arena many other initiatives besides tariffs have been called protectionist. For example, some commentators, such as Jagdish Bhagwati, see developed countries efforts in imposing their own labor or environmental standards as protectionism. Also, the imposition of restrictive certification procedures on imports are seen in this light. Further, others point out that free trade agreements often have protectionist provisions such as intellectual property, copyright, and patent restrictions that benefit large corporations. These provisions restrict trade in music, movies, drugs, software, and other manufactured items to high cost producers with quotas from low cost producers set to zero.[8][9]
[edit] Arguments for protectionism
Protectionists believe that there is a legitimate need for government restrictions on free trade in order to protect their country‘s economy and its people‘s standard of living.
[edit] The "Comparative Advantage" argument has lost its legitimacy
The Comparative Advantage argument is used by most economists as a basis for their support of free trade policies. Opponents of these policies argue that the Comparative Advantage argument has lost its legitimacy in a globally integrated world—in which capital is free to move internationally. Herman Daly, a leading voice in the discipline of ecological economics, emphasizes that although Ricardo's theory of comparative advantage is one of the most elegant theories in economics, its application to the present day is illogical: "Free capital mobility totally undercuts Ricardo's comparative advantage argument for free trade in goods, because that argument is explicitly and essentially premised on capital (and other factors) being immobile between nations. Under the new global economy, capital tends simply to flow to wherever costs are lowest—that is, to pursue absolute advantage." [10]
Protectionists would point to the building of plants and shifting of production to Mexico by American companies such as GE, GM, and even Hershey Chocolate as proof of this argument. The Comparative Advantage argument is also premised on full employment. According to the Wikipedia entry on Comparative Advantage, ―if one or other of the economies has less than full employment of factors of production, then this excess capacity must usually be used up before the comparative advantage reasoning can be applied‖. Protectionists believe that it is therefore erroneous to base trade policy on the principle of Comparative Advantage in those countries that suffer from significant unemployment or underemployment.
[edit] Domestic tax policies can favor foreign goods
Protectionists believe that allowing foreign goods to enter domestic markets without being subject to tariffs or other forms of taxation, leads to a situation where domestic goods are at a disadvantage, a kind of reverse protectionism. By ruling out revenue tariffs on foreign products, governments must rely solely on domestic taxation to provide its revenue, which falls disproportionately on domestic manufacturing. As Paul Craig Roberts notes: "[Foreign discrimination of US products] is reinforced by the US tax system, which imposes no appreciable tax burden on foreign goods and services sold in the US but imposes a heavy tax burden on US producers of goods and services regardless of whether they are sold within the US or exported to other countries."[11] Protectionists argue that this reverse protectionism is most clearly seen and most detrimental to those countries (such as the US) that do not participate in the Value Added Tax (VAT) system. This is a system which generates revenues from taxation on the sale of goods and services, whether foreign or domestic. Protectionists argue that a country that does not participate is at a distinct disadvantage when trading with a country that does. That the final selling price of a product from a non-participating country sold in a country with a VAT tax must bear not only the tax burden of the country of origin, but also a portion of the tax burden of the country where it is being sold. Conversely, the selling price of a product made in a participating country and sold in a country that does not participate, bears no part of the tax burden of the country in which it is sold (as do the domestic products it is competing with). Moreover, the participating country rebates VAT taxes collected in the manufacture of a product if that product is sold in a non-participating country. This allows exporters of goods from participating countries to reduce the price of products sold in non-participating countries. Protectionists believe that governments should address this inequity, if not by adopting a VAT tax, then by at least imposing compensating taxes (tariffs) on imports.
[edit] Infant industry argument
Main article: Infant industry argument Protectionists believe that infant industries must be protected in order to allow them to grow to a point where they can fairly compete with the larger mature industries established in foreign countries. They believe that without this protection, infant industries will die before they reach a size and age where economies of scale, industrial infrastructure, and skill in
manufacturing have progressed sufficiently allow the industry to compete in the global market.[citation needed]
[edit] Unrestricted trade undercuts domestic policies for social good
Most industrialized governments have long held that laissez-faire capitalism creates social evils that harm its citizens. To protect those citizens, these governments have enacted laws that restrict what companies can and can not do in pursuit of profit. Examples are laws regarding:
child labor environmental protection competition (antitrust) occupational safety and health equal opportunity collective bargaining minimum wage intellectual property
Protectionists argue that these laws place an economic burden on domestic companies bound by them that put those companies at a disadvantage when they compete, both domestically and abroad, with goods and services produced by companies unfettered by such restrictions. They argue that governments have a responsibility to protect their corporations as well as their citizens when putting its companies at a competitive disadvantage by enacting laws for social good. Otherwise, they believe that these laws end up destroying domestic companies and ultimately hurting the citizens these laws were designed to protect.
[edit] Arguments against protectionism
Protectionism is frequently criticized by mainstream economists as harming the people it is meant to help. Most mainstream economists instead support free trade.[1][4] Economic theory, under the principle of comparative advantage, shows that the gains from free trade outweigh any losses as free trade creates more jobs than it destroys because it allows countries to specialize in the production of goods and services in which they have a comparative advantage.[12] Protectionism results in deadweight loss; this loss to overall welfare gives noone any benefit, unlike in a free market, where there is no such total loss. According to economist Stephen P. Magee, the benefits of free trade outweigh the losses by as much as 100 to 1.[13] Most economists, including Nobel prize winners Milton Friedman and Paul Krugman, believe that free trade helps workers in developing countries, even though they are not subject to the stringent health and labour standards of developed countries. This is because "the growth of manufacturing — and of the myriad other jobs that the new export sector creates — has a ripple effect throughout the economy" that creates competition among producers, lifting wages and living conditions.[14] Economists[who?] have suggested that those who support protectionism ostensibly to further the interests of workers in least developed countries are in fact being disingenuous, seeking only to protect jobs in developed countries.[15] Additionally, workers in the least developed countries only accept jobs if they are the best on offer, as all mutually consensual exchanges must be of benefit to both sides,
else they wouldn't be entered into freely. That they accept low-paying jobs from companies in developed countries shows that their other employment prospects are worse. A letter reprinted in the May 2010 edition of Econ Journal Watch identifies a similar sentiment against protectionism from sixteen British economists at the beginning of the 20th century.[16] Alan Greenspan, former chair of the American Federal Reserve, has criticized protectionist proposals as leading "to an atrophy of our competitive ability. ... If the protectionist route is followed, newer, more efficient industries will have less scope to expand, and overall output and economic welfare will suffer."[17] Protectionism has also been accused of being one of the major causes of war. Proponents of this theory point to the constant warfare in the 17th and 18th centuries among European countries whose governments were predominantly mercantilist and protectionist, the American Revolution, which came about primarily due to British tariffs and taxes, as well as the protective policies preceding both World War I and World War II. According to Frederic Bastiat, "When goods cannot cross borders, armies will." Free trade promotes equal access to domestic resources (human, natural, capital, etc.) for domestic participants and foreign participants alike. Some thinkers[who?] extend that under free trade, citizens of participating countries deserve equal access to resources and social welfare (labor laws, education, etc.). Visa entrance policies tend to discourage free reallocation between many countries, and encourage it with others. High freedom and mobility has been shown to lead to far greater development than aid programs in many cases, for example eastern European countries in the European Union. In other words visa entrance requirements are a form of local protectionism.
[edit] Current world trends
Since the end of World War II, it has been the stated policy of most First World countries to eliminate protectionism through free trade policies enforced by international treaties and organizations such as the World Trade Organization[citation needed]. Certain policies of First World governments have been criticized as protectionist, however, such as the Common Agricultural Policy[18] in the European Union and proposed "Buy American" provisions[19] in economic recovery packages in the United States. The current round of trade talks by the World Trade Organization is the Doha Development Round and the last session of talks in Geneva, Switzerland led to an impasse. The leaders' statement in the G20 meeting in London in early 2009 included a promise to continue the Doha Round.
[edit] Protectionism after the 2008 financial crisis
Heads of the G20 at their recent London summit pledged to abstain from imposing any trade protectionist measures. Although they were reiterating what they had already committed to, last November in Washington, 17 of these 20 countries were reported by the World Bank as having imposed trade restrictive measures since then. In its report, the World Bank says most of the world's major economies are resorting to protectionist measures as the global economic slowdown begins to bite. Economists who have examined the impact of new trade-restrictive measures using detailed bilaterally monthly trade statistics estimated that new measures taken
through late 2009 were distorting global merchandise trade by 1/4 to 1/2 percent (about $50 billion a year).http://www.imf.org/external/pubs/ft/spn/2010/spn1007.pdf
[edit] New US incoming airmail compliance
Despite pledges to abstain from protectionism, the US has imposed a new 'security check' on all international airmail entering the US that weighs over 453 grams from November 2010. In addition to the 48 hour delay on all such airmail, compliance fees have been shifted onto the international postal services. Effectively this is protectionism under the guise of 'aviation security'. For example,
Australia - an additional $9AUD is charged in Australia for the cost of compliance making the posting of most small items to the US uneconomical.[20] Japan - postage of all parcels over 453 grams to the US by regular customers has been banned as result.[21] Thailand - ban on all parcels to the US, weighting over 453 grams till February 2011.[22]
From Wikipedia, the free encyclopedia
Jump to: navigation, search "Protectionist" redirects here. For other uses, see Protectionist (disambiguation).
Part of a series on
Economic systems
Ideological systems
Anarchist · Capitalist Communist · Corporatist Fascist · Georgist Islamic · Laissez-faire Market socialist · (Neo-) Mercantilist Participatory Protectionist · Socialist Syndicalist
Systems
Closed (Autarky) · Digital Dual · Gift · Informal Market · Mixed · Natural Open · Planned · Subsistence Underground · Virtual
Sectors
State Sector · Private sector Voluntary sector · Nationalization Privatization · Municipalization Liberalization · Corporatization Deregulation · Socialization Collectivization · Common ownership
Marketization · Expropriation Financialization Other types of economies Anglo-Saxon · Feudal Global · Hunter-gatherer Information Newly industrialized country Palace · Plantation Post-capitalist · Post-industrial Social market · Socialist market Token · Traditional Transition · Barter State capitalist · State-directed Business and economics portal v·d·e
Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to discourage imports and prevent foreign take-over of domestic markets and companies. This policy contrasts with free trade, where government barriers to trade and movement of capital are kept to a minimum. In recent years, it has become closely aligned with antiglobalization. The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which protect businesses and workers within a country by restricting or regulating trade with foreign nations.
Contents
[hide]
1 History o 1.1 Protectionism in the United States 2 Protectionist policies o 2.1 De facto protectionism 3 Arguments for protectionism o 3.1 The "Comparative Advantage" argument has lost its legitimacy o 3.2 Domestic tax policies can favor foreign goods o 3.3 Infant industry argument o 3.4 Unrestricted trade undercuts domestic policies for social good 4 Arguments against protectionism
5 Current world trends o 5.1 Protectionism after the 2008 financial crisis o 5.2 New US incoming airmail compliance 6 See also 7 References 8 External links
[edit] History
Punch cartoon, 1930: The character on the right represents a skeptical Britain becoming increasingly protectionist and dissatisfied with its Free Trade policies, as represented by the Micawber character to the left, during the Great Depression. Historically, protectionism was associated with economic theories such as mercantilism (that believed that it is beneficial to maintain a positive trade balance), and import substitution. During that time, Adam Smith famously warned against the 'interested sophistry' of industry, seeking to gain advantage at the cost of the consumers.[1] Most modern economists agree that protectionism is harmful in that its costs outweigh the benefits, and that it impedes economic growth.[2][3] Economics Nobel prize winner and trade theorist Paul Krugman once famously stated that, "If there were an Economist‘s Creed, it would surely contain the affirmations 'I understand the Principle of Comparative Advantage' and 'I advocate Free Trade'."[4] Recent examples of protectionism in developed countries are typically motivated by the desire to protect the livelihoods of individuals in politically important domestic industries.[citation needed] Whereas formerly mostly blue-collar jobs were being lost from developed countries to foreign competition[citation needed], in recent years there has been a renewed discussion[by whom?] of protectionism due to offshore outsourcing and the loss of white-collar jobs.
[edit] Protectionism in the United States
Free trade and protectionism are regional issues. Free trade in America is the policy of economics developed by American slave holding states and protectionism is a northern, manufacturing issue.[citation needed] Although not as animating an issue as slavery, differences in trade between the two regions contributed to the Civil War and remain a point of national difference even today.[citation needed] Historically, southern slave holding states, because of their low cost manual labor, had little perceived need for mechanization, and supported having the right to purchase manufactured goods from any nation. Thus they called themselves free traders. Northern states, on the other hand, sought to develop a manufacturing capacity, and successfully raised tariffs to allow nascent Northern manufacturers to compete with British competitors. Beginning with 1st U.S. Secretary of the Treasury Alexander Hamilton's "Report on Manufactures", in which he advocated tariffs to help protect infant industries, including bounties (subsidies) derived in part from those tariffs, the United States was the leading nation opposed to "free trade" theory. Throughout the 19th century, leading U.S. statesmen, including Senator Henry Clay, continued Hamilton's themes within the Whig Party under the name "American System." The opposed Southern Democratic Party contested several elections throughout the 1830s, 1840s, and 1850s in part over the issue of the tariff and protection of industry. However, Southern Democrats were never as strong in the US House as the more populated North. The Northern Whigs sought and got higher protective tariffs, over the bitter resistance of the South. One Southern state precipitated what was called the nullification crisis over the issue of tariffs, arguing that states had the right to ignore federal laws. Mostly over the issue of abolition and other scandals, the Whigs would ultimately collapse, leaving a void which the fledgling Republican Party, led by Abraham Lincoln, would fill. Lincoln, who called himself a "Henry Clay tariff Whig", strongly opposed free trade. He implemented a 44 percent tariff during the Civil War in part to pay for the building of the Union-Pacific Railroad, the war effort, and to protect American industry.[5] This support for Northern industry was ultimately successful. By President Lincoln's term, the northern manufacturing states had ten times the GDP of the South. Armed with this economic advantage, the North was easily able to defeat the South by starving the South of weapons through a near total blockade, while at the same time was able to supply its own army with everything from heavy artillery to repeating Henry rifles. With the North winning the Civil War, Republican dominance was assured over the Democrats. Republicans continued to dominate American politics until around the early 20th century. President William McKinley stated the United States' stance under the Republican Party as thus: "Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man. [It is said] that protection is immoral…. Why, if protection builds up and elevates 63,000,000 [the U.S. population] of people, the influence of those 63,000,000 of people elevates the rest of the world. We cannot take a step in the pathway of progress without benefiting mankind everywhere. Well,
they say, ‗Buy where you can buy the cheapest'…. Of course, that applies to labor as to everything else. Let me give you a maxim that is a thousand times better than that, and it is the protection maxim: ‗Buy where you can pay the easiest.' And that spot of earth is where labor wins its highest rewards."[6] Southern Democrats gradually rebuilt their party, and allied themselves with Northern Progressives. They had many differences but both were staunchly opposed to the great corporate trusts that had built up, and Republican corruption was endemic.[citation needed] This marriage of convenience to face a common enemy reinvigorated the Democratic Party, which catapulted back into power. Northern Progressives sought free trade to undermine the power base of Republicans – Woodrow Wilson would admit as much in a speech to Congress. A brief resurgence by Republicans in the 1920s was disastrous for them. Woodrow Wilson's ideological understudy[citation needed], Franklin Roosevelt, would essentially blame the Great Depression upon the protectionist policies exemplified by the previous Republican President, Herbert Hoover.[citation needed]
[edit] Protectionist policies
A variety of policies have been claimed to achieve protectionist goals. These include: 1. Tariffs: Typically, tariffs (or taxes) are imposed on imported goods. Tariff rates usually vary according to the type of goods imported. Import tariffs will increase the cost to importers, and increase the price of imported goods in the local markets, thus lowering the quantity of goods imported. Tariffs may also be imposed on exports, and in an economy with floating exchange rates, export tariffs have similar effects as import tariffs. However, since export tariffs are often perceived as 'hurting' local industries, while import tariffs are perceived as 'helping' local industries, export tariffs are seldom implemented. 2. Import quotas: To reduce the quantity and therefore increase the market price of imported goods. The economic effects of an import quota is similar to that of a tariff, except that the tax revenue gain from a tariff will instead be distributed to those who receive import licenses. Economists often suggest that import licenses be auctioned to the highest bidder, or that import quotas be replaced by an equivalent tariff. 3. Administrative barriers: Countries are sometimes accused of using their various administrative rules (e.g. regarding food safety, environmental standards, electrical safety, etc.) as a way to introduce barriers to imports. 4. Anti-dumping legislation Supporters of anti-dumping laws argue that they prevent "dumping" of cheaper foreign goods that would cause local firms to close down. However, in practice, anti-dumping laws are usually used to impose trade tariffs on foreign exporters. 5. Direct subsidies: Government subsidies (in the form of lump-sum payments or cheap loans) are sometimes given to local firms that cannot compete well against foreign imports. These subsidies are purported to "protect" local jobs, and to help local firms adjust to the world markets. 6. Export subsidies: Export subsidies are often used by governments to increase exports. Export subsidies are the opposite of export tariffs, exporters are paid a percentage of the value of their exports. Export subsidies increase the amount of trade, and in a country with floating exchange rates, have effects similar to import subsidies. 7. Exchange rate manipulation: A government may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign
exchange market. Doing so will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade balance. However, such a policy is only effective in the short run, as it will most likely lead to inflation in the country, which will in turn raise the cost of exports, and reduce the relative price of imports. 8. International patent systems: There is an argument for viewing national patent systems as a cloak for protectionist trade policies at a national level. Two strands of this argument exist: one when patents held by one country form part of a system of exploitable relative advantage in trade negotiations against another, and a second where adhering to a worldwide system of patents confers "good citizenship" status despite 'de facto protectionism'. Peter Drahos explains that "States realized that patent systems could be used to cloak protectionist strategies. There were also reputational advantages for states to be seen to be sticking to intellectual property systems. One could attend the various revisions of the Paris and Berne conventions, participate in the cosmopolitan moral dialogue about the need to protect the fruits of authorial labor and inventive genius...knowing all the while that one's domestic intellectual property system was a handy protectionist weapon." [7]
[edit] De facto protectionism
In the modern trade arena many other initiatives besides tariffs have been called protectionist. For example, some commentators, such as Jagdish Bhagwati, see developed countries efforts in imposing their own labor or environmental standards as protectionism. Also, the imposition of restrictive certification procedures on imports are seen in this light. Further, others point out that free trade agreements often have protectionist provisions such as intellectual property, copyright, and patent restrictions that benefit large corporations. These provisions restrict trade in music, movies, drugs, software, and other manufactured items to high cost producers with quotas from low cost producers set to zero.[8][9]
[edit] Arguments for protectionism
Protectionists believe that there is a legitimate need for government restrictions on free trade in order to protect their country‘s economy and its people‘s standard of living.
[edit] The "Comparative Advantage" argument has lost its legitimacy
The Comparative Advantage argument is used by most economists as a basis for their support of free trade policies. Opponents of these policies argue that the Comparative Advantage argument has lost its legitimacy in a globally integrated world—in which capital is free to move internationally. Herman Daly, a leading voice in the discipline of ecological economics, emphasizes that although Ricardo's theory of comparative advantage is one of the most elegant theories in economics, its application to the present day is illogical: "Free capital mobility totally undercuts Ricardo's comparative advantage argument for free trade in goods, because that argument is explicitly and essentially premised on capital (and other factors) being immobile between nations. Under the new global economy, capital tends simply to flow to wherever costs are lowest—that is, to pursue absolute advantage." [10]
Protectionists would point to the building of plants and shifting of production to Mexico by American companies such as GE, GM, and even Hershey Chocolate as proof of this argument. The Comparative Advantage argument is also premised on full employment. According to the Wikipedia entry on Comparative Advantage, ―if one or other of the economies has less than full employment of factors of production, then this excess capacity must usually be used up before the comparative advantage reasoning can be applied‖. Protectionists believe that it is therefore erroneous to base trade policy on the principle of Comparative Advantage in those countries that suffer from significant unemployment or underemployment.
[edit] Domestic tax policies can favor foreign goods
Protectionists believe that allowing foreign goods to enter domestic markets without being subject to tariffs or other forms of taxation, leads to a situation where domestic goods are at a disadvantage, a kind of reverse protectionism. By ruling out revenue tariffs on foreign products, governments must rely solely on domestic taxation to provide its revenue, which falls disproportionately on domestic manufacturing. As Paul Craig Roberts notes: "[Foreign discrimination of US products] is reinforced by the US tax system, which imposes no appreciable tax burden on foreign goods and services sold in the US but imposes a heavy tax burden on US producers of goods and services regardless of whether they are sold within the US or exported to other countries."[11] Protectionists argue that this reverse protectionism is most clearly seen and most detrimental to those countries (such as the US) that do not participate in the Value Added Tax (VAT) system. This is a system which generates revenues from taxation on the sale of goods and services, whether foreign or domestic. Protectionists argue that a country that does not participate is at a distinct disadvantage when trading with a country that does. That the final selling price of a product from a non-participating country sold in a country with a VAT tax must bear not only the tax burden of the country of origin, but also a portion of the tax burden of the country where it is being sold. Conversely, the selling price of a product made in a participating country and sold in a country that does not participate, bears no part of the tax burden of the country in which it is sold (as do the domestic products it is competing with). Moreover, the participating country rebates VAT taxes collected in the manufacture of a product if that product is sold in a non-participating country. This allows exporters of goods from participating countries to reduce the price of products sold in non-participating countries. Protectionists believe that governments should address this inequity, if not by adopting a VAT tax, then by at least imposing compensating taxes (tariffs) on imports.
[edit] Infant industry argument
Main article: Infant industry argument Protectionists believe that infant industries must be protected in order to allow them to grow to a point where they can fairly compete with the larger mature industries established in foreign countries. They believe that without this protection, infant industries will die before they reach a size and age where economies of scale, industrial infrastructure, and skill in
manufacturing have progressed sufficiently allow the industry to compete in the global market.[citation needed]
[edit] Unrestricted trade undercuts domestic policies for social good
Most industrialized governments have long held that laissez-faire capitalism creates social evils that harm its citizens. To protect those citizens, these governments have enacted laws that restrict what companies can and can not do in pursuit of profit. Examples are laws regarding:
child labor environmental protection competition (antitrust) occupational safety and health equal opportunity collective bargaining minimum wage intellectual property
Protectionists argue that these laws place an economic burden on domestic companies bound by them that put those companies at a disadvantage when they compete, both domestically and abroad, with goods and services produced by companies unfettered by such restrictions. They argue that governments have a responsibility to protect their corporations as well as their citizens when putting its companies at a competitive disadvantage by enacting laws for social good. Otherwise, they believe that these laws end up destroying domestic companies and ultimately hurting the citizens these laws were designed to protect.
[edit] Arguments against protectionism
Protectionism is frequently criticized by mainstream economists as harming the people it is meant to help. Most mainstream economists instead support free trade.[1][4] Economic theory, under the principle of comparative advantage, shows that the gains from free trade outweigh any losses as free trade creates more jobs than it destroys because it allows countries to specialize in the production of goods and services in which they have a comparative advantage.[12] Protectionism results in deadweight loss; this loss to overall welfare gives noone any benefit, unlike in a free market, where there is no such total loss. According to economist Stephen P. Magee, the benefits of free trade outweigh the losses by as much as 100 to 1.[13] Most economists, including Nobel prize winners Milton Friedman and Paul Krugman, believe that free trade helps workers in developing countries, even though they are not subject to the stringent health and labour standards of developed countries. This is because "the growth of manufacturing — and of the myriad other jobs that the new export sector creates — has a ripple effect throughout the economy" that creates competition among producers, lifting wages and living conditions.[14] Economists[who?] have suggested that those who support protectionism ostensibly to further the interests of workers in least developed countries are in fact being disingenuous, seeking only to protect jobs in developed countries.[15] Additionally, workers in the least developed countries only accept jobs if they are the best on offer, as all mutually consensual exchanges must be of benefit to both sides,
else they wouldn't be entered into freely. That they accept low-paying jobs from companies in developed countries shows that their other employment prospects are worse. A letter reprinted in the May 2010 edition of Econ Journal Watch identifies a similar sentiment against protectionism from sixteen British economists at the beginning of the 20th century.[16] Alan Greenspan, former chair of the American Federal Reserve, has criticized protectionist proposals as leading "to an atrophy of our competitive ability. ... If the protectionist route is followed, newer, more efficient industries will have less scope to expand, and overall output and economic welfare will suffer."[17] Protectionism has also been accused of being one of the major causes of war. Proponents of this theory point to the constant warfare in the 17th and 18th centuries among European countries whose governments were predominantly mercantilist and protectionist, the American Revolution, which came about primarily due to British tariffs and taxes, as well as the protective policies preceding both World War I and World War II. According to Frederic Bastiat, "When goods cannot cross borders, armies will." Free trade promotes equal access to domestic resources (human, natural, capital, etc.) for domestic participants and foreign participants alike. Some thinkers[who?] extend that under free trade, citizens of participating countries deserve equal access to resources and social welfare (labor laws, education, etc.). Visa entrance policies tend to discourage free reallocation between many countries, and encourage it with others. High freedom and mobility has been shown to lead to far greater development than aid programs in many cases, for example eastern European countries in the European Union. In other words visa entrance requirements are a form of local protectionism.
[edit] Current world trends
Since the end of World War II, it has been the stated policy of most First World countries to eliminate protectionism through free trade policies enforced by international treaties and organizations such as the World Trade Organization[citation needed]. Certain policies of First World governments have been criticized as protectionist, however, such as the Common Agricultural Policy[18] in the European Union and proposed "Buy American" provisions[19] in economic recovery packages in the United States. The current round of trade talks by the World Trade Organization is the Doha Development Round and the last session of talks in Geneva, Switzerland led to an impasse. The leaders' statement in the G20 meeting in London in early 2009 included a promise to continue the Doha Round.
[edit] Protectionism after the 2008 financial crisis
Heads of the G20 at their recent London summit pledged to abstain from imposing any trade protectionist measures. Although they were reiterating what they had already committed to, last November in Washington, 17 of these 20 countries were reported by the World Bank as having imposed trade restrictive measures since then. In its report, the World Bank says most of the world's major economies are resorting to protectionist measures as the global economic slowdown begins to bite. Economists who have examined the impact of new trade-restrictive measures using detailed bilaterally monthly trade statistics estimated that new measures taken
through late 2009 were distorting global merchandise trade by 1/4 to 1/2 percent (about $50 billion a year).http://www.imf.org/external/pubs/ft/spn/2010/spn1007.pdf
[edit] New US incoming airmail compliance
Despite pledges to abstain from protectionism, the US has imposed a new 'security check' on all international airmail entering the US that weighs over 453 grams from November 2010. In addition to the 48 hour delay on all such airmail, compliance fees have been shifted onto the international postal services. Effectively this is protectionism under the guise of 'aviation security'. For example,
Australia - an additional $9AUD is charged in Australia for the cost of compliance making the posting of most small items to the US uneconomical.[20] Japan - postage of all parcels over 453 grams to the US by regular customers has been banned as result.[21] Thailand - ban on all parcels to the US, weighting over 453 grams till February 2011.[22]
